THOMAS S. SMITH
(303) 629-3406
FAX (303) 629-3450
[email protected]
January 8, 2001
Via EDGAR
United States Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Cognigen Networks, Inc.
File No. 000-11730
Revised Preliminary Proxy Materials for Special Meeting of
Shareholders
Ladies and Gentlemen:
Enclosed for filing are copies of a revised preliminary Notice of
Special Meeting of Shareholders, Proxy Statement and Proxy to be used in
connection with a Special Meeting of Shareholders of Cognigen Networks, Inc.
("Company") to be held in February 2001. Also accompanying this filing is a
letter from the Company responding to the comments of the staff contained in
its letters dated November 28 and 29, 2000.
Please contact me with any comments the Staff may have on the revised
preliminary proxy materials as soon as possible so that the Company can make
any changes and proceed with the mailing.
Sincerely yours,
---------------------------
Thomas S. Smith
TSS/pg
Enclosures
cc: Cognigen Networks, Inc.
Attn: Darrell H. Hughes
Attn: David L. Jackson
COGNIGEN NETWORKS, INC.
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|X| Preliminary Proxy Statement
|_| Confidential for use of the Commission Only (as permitted by Rule 14a-6(e)(2))
|_| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
COGNIGEN NETWORKS, INC.
(Name of Registrant as Specified in its Charter)
Payment of Filing Fee (Check the appropriate box):
|X| No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which the transaction
applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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|_| Fee paid previously with preliminary materials.
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|_| Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing
for which the offsetting fee was paid previously. Identify the
previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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PRELIMINARY COPY
COGNIGEN NETWORKS, INC.
7001 Seaview Avenue NW
Suite 210
Seattle, Washington 98117
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To be held on February __, 2001
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the "Meeting")
of Cognigen Networks, Inc., a Colorado corporation (the "Company"), will be held in
the Special Events Room on the Second Floor, 7001 Seaview Avenue, NW, Seattle,
Washington 98117, on ____________, February __, 2001, at 10:00 a.m., Pacific Time,
for the purpose of considering and voting upon proposals to:
(1) adopt an amendment to Article THIRD of the Articles of Incorporation of the
Company to delete any reference contained in the current Article THIRD
to an area of business in which the Company no longer engages and to
change the wording of the provision in the current Article THIRD that
confers upon the Company all of the rights, powers and privileges
conferred on Colorado corporations;
(2) adopt an amendment to Article FOURTH of the Articles of Incorporation of the
Company which, among other things, increases the authorized shares of
common stock of the Company from 50,000,000 shares to 300,000,000 shares
of $0.001 par value common stock and authorizes 20,000,000 shares of no
par value preferred stock;
(3) adopt an amendment to Section (d)(ii) of Article EIGHTH of the Articles of
Incorporation of the Company to change the vote required to amend the
Articles of Incorporation to a majority of a quorum;
(4) adopt a new Article NINTH of the Articles of Incorporation of the Company
which limits the liability of the directors of the Company under certain
circumstances;
(5) authorize the Board of Directors of the Company to adopt an amendment to the
Company's Articles of Incorporation at such time as the Board of
Directors deems it appropriate to effectuate a one-for-two, a
one-for-three or a one-for-four reverse split of the Company's
outstanding common stock, the exact reverse split to be determined by
the Board of Directors of the Company; and
(6) approve the Company's 2000 Incentive and Nonstatutory Stock Option Plan.
Only shareholders of record at the close of business on January ___, 2001,
are entitled to notice of and to vote at the Meeting and at any adjournment(s)
thereof.
The enclosed Proxy is solicited by and on behalf of the Board of Directors of
the Company. All shareholders are cordially invited to attend the Meeting in
person. Whether you plan to attend or not, please date, sign and return the
accompanying proxy in the enclosed return envelope, to which no postage need be
affixed if mailed in the United States. The giving of a proxy will not affect your
right to vote in person if you attend the Meeting.
BY ORDER OF THE BOARD OF DIRECTORS
DAVID L. JACKSON, SECRETARY
Seattle, Washington
January __, 2001
PRELIMINARY COPY
COGNIGEN NETWORKS, INC.
7001 Seaview Avenue NW
Suite 210
Seattle, Washington 98117
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY ___, 2001
This proxy statement ("Proxy Statement") is being furnished in connection with
the solicitation of proxies by the Board of Directors of Cognigen Networks, Inc.
(the "Company") to be used at a Special Meeting of Shareholders (the "Meeting") to
be held in the Special Events Room on the Second Floor, 7001 Seaview Avenue, N.W.,
Seattle, Washington 98117, on ___________, February ___, 2001, at 10:00 a.m. Pacific
Time, and at any adjournment(s) thereof.
This Proxy Statement and the accompanying Proxy will be mailed to the
Company's shareholders on or about January ___, 2001.
REVOCATION AND VOTING OF PROXY
Any person signing and mailing the enclosed Proxy may revoke it at any time
before it is voted by: (i) giving written notice of the revocation to the Company's
corporate secretary; (ii) voting in person at the Meeting; or (iii) voting again by
submitting a new proxy card. Only the latest dated proxy card, including one which
a person may vote in person at the Meeting, will count. If not revoked, the Proxy
will be voted at the Meeting in accordance with the instructions indicated on the
Proxy by the shareholder, or, if no instructions are indicated, FOR the proposed
amendments to the Company's Articles of Incorporation; FOR approval of a proposal to
authorize the Board of Directors of the Company to adopt an amendment to the
Company's Articles of Incorporation at such time as the Board of Directors deems it
appropriate to effectuate a one-for-two, a one-for-three, a one-for-four reverse
split of the Company's outstanding common stock, the exact reverse split to be
determined by the Board of Directors of the Company; and FOR approval of the
Company's 2000 Incentive and Nonstatutory Stock Option Plan.
SUMMARY TERM SHEET
One of the proposals that will be considered and voted upon at the Meeting is
a proposal to adopt an amendment to Article FOURTH of the Articles of Incorporation
of the Company to increase the Company's authorized shares of common stock. One of
the reasons to increase the Company's authorized shares of common stock is so that
the Company can pay the balance of the consideration to be paid in connection with
the acquisition of the assets of Inter-American Telecommunications Holding
Corporation ("ITHC"). The following is a summary of the transaction. The summary
does not contain all the information that may be deemed to be important to a
shareholder. Each shareholder should carefully review the entire proxy statement to
fully understand the transaction between the Company and ITHC.
Acquisition.
o Shareholder Vote. The shareholders of the Company are being asked to vote to
approve an amendment to Article FOURTH of the Company's Articles of
Incorporation to increase the number of authorized shares of common stock
of the Company so that the Company will be able to issue additional shares
of the Company's common stock to ITHC in connection with the acquisition of
all of the assets of ITHC by the Company. The Company currently does not
have a sufficient number of authorized shares of common stock to issue the
number of additional shares of common stock to which ITHC is entitled.
o Consideration. The consideration paid and payable by the Company to ITHC for
the assets consists of:
- 11,742,953 shares of the Company's common stock that were issued at the
first closing;
- 37,298,444 shares of the Company's common stock that are to be issued at
the second closing; and
- the assumption by the Company of all of the liabilities of ITHC that
existed on August 20, 1999.
Percentages Owned by ITHC
As a result of ITHC's receipt of the 11,742,953 shares of the Company's common
stock from the Company and a previous purchase of 12,602,431 shares of the Company's
common stock from four individuals, ITHC owned 24,345,384 shares, or what would have
been approximately 75.0% of the Company's outstanding shares of common stock as of
August 20, 1999. Subsequently, 150,000 shares were transferred by ITHC to two
persons who were affiliated with CCRI Corp. and were instrumental in CCRI Corp.
assisting the Company in raising additional capital. In May 2000, ITHC distributed
the remaining 24,195,354 shares pro rata to its shareholders. If the proposal to
adopt the amendment to Article FOURTH of the Articles of Incorporation is approved,
ITHC will receive 37,298,444 shares, or approximately 44.2% of the Company's then
outstanding shares of common stock. It is contemplated that ITHC will distribute
the 37,298,444 shares pro rata to its shareholders.
Reason for the Acquisition.
From 1989 to August 20, 1999, the Company had no business operations and had
been seeking a business opportunity to acquire. On March 11, 1999, the Company
entered into an agreement to acquire all the outstanding shares of Price net.com;
however, this agreement was terminated on March 30, 1999.
On August 20, 1999, the Company acquired all of the assets of ITHC in exchange
for the Company's common stock. ITHC is engaged in marketing long distance
telecommunications services directly and through the internet. The directors of the
Company believed that the acquisition of the assets of ITHC would enable the Company
to be actively engaged in an existing, on-going business (not a start-up company)
that the directors of the Company believed had substantial growth potential.
Fairness of the Acquisition.
The then directors of the Company carefully considered the acquisition of the
assets of ITHC and the number of shares of the Company's stock that would be issued
to ITHC in connection with the acquisition. The directors believed that the Company
had found a viable, on-going business (not a start-up company) and that the number
of shares that the Company would have to issue to ITHC, considering the fact that
the Company was unable to complete an acquisition over the past ten years, was
reasonable in light of what the directors believed was the potential for growth of
the business acquired. The directors did not retain a financial advisor to opine as
to the fairness of the transaction.
Unanimous Director Recommendation.
The directors unanimously approved the transaction whereby the Company
acquired the assets of ITHC and recommend that the shareholders approve an amendment
to Article FOURTH of the Company's Articles of Incorporation to increase the
authorized shares of common stock of the Company so that the Company is able to
issue the additional 37,298,444 shares to ITHC to complete the acquisition.
However, if the Company does not increase the authorized number of shares in order
to issue the additional shares to ITHC, ITHC could claim that ITHC did not receive
all of the consideration it was entitled to in connection with the acquisition and
claim damages from the Company or attempt to rescind the transaction. There is no
penalty imposed upon the Company if the Company does not increase the authorized
number of shares to complete the acquisition. The Company has been orally advised
that shareholders holding approximately 50.7% of the outstanding shares of common
stock of the Company intend to vote in favor of increasing the number of authorized
shares of the Company.
Interest of Directors in the Transaction.
Just prior to August 20, 1999, Jimmy L. Boswell and David G. Lucas were
directors, officers and owners of less than 5% of the outstanding common stock of
ITHC and David L. Jackson and his wife were the directors and officers of the
Company and David L. Jackson was the owner of less than 5% of the outstanding common
stock of ITHC. Darrell H. Hughes was employed after August 20, 1999, and obtained
approximately 10.5% of the outstanding common stock of ITHC. As a result of being
shareholders of ITHC, Jimmy L. Boswell, David G. Lucas, David L. Jackson and Darrell
H. Hughes will benefit from the additional shares to be issued to ITHC.
Contact Information.
If you have any questions regarding this transaction or any other matters
discussed in this proxy statement, please contact:
David L. Jackson
P.O. Box 9345
Rancho Santa Fe, California 92067-4345
Further Information.
For further information pertaining to the transaction between the Company and
ITHC and the proposal to adopt an amendment to Article FOURTH of the Company's
Articles of Incorporation, see "Changes in Control of the Company", "Certain
Information Pertaining to the Company and ITHC" and "Proposal Number Three."
VOTING SECURITIES
Voting rights are vested exclusively in the holders of the Company's $0.001
par value common stock with each share entitled to one vote. Cumulative voting
in the election of directors is not permitted. Only shareholders of record at
the close of business on January ___, 2001, are entitled to notice of and to
vote at the Meeting or any adjournments thereof. On January ___, 2001, the
Company had 47,002,547 shares of common stock outstanding.
PRINCIPAL SHAREHOLDERS AND
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth as of January ___, 2001, the number of
shares of the Company's outstanding common stock beneficially owned by each of
the Company's current directors and by each person who is expected to become a
director prior to the Meeting, sets forth the number of shares of the Company's
common stock beneficially owned by all of the Company's current executive
officers and directors as a group, and sets forth the number of shares of the
Company's common stock owned by each person who owned of record, or was known to
own beneficially, more than 5% of the outstanding shares of the Company's common
stock, in both cases currently and assuming additional shares of the Company's
common stock are issued to and distributed by ITHC pro rata to its shareholders:
Amount and
Nature of
Beneficial
Ownership Percent of
Assuming Class Assuming
Additional Additional
Shares Are Shares Are
Issued to and Issued to and
Amount and Distributed by Distributed
Nature of ITHC Pro Rata by ITHC
Beneficial Percent of to its Pro Rata to Its
Name and Address Ownership(1) Class Shareholders(15) Shareholders
Jimmy L. Boswell
Suite 304 2,618,468(3) 5.4% 3,600,003 4.2%
3220 South Higuera Street
San Luis Obispo, CA 93401
Troy D. Carl
6751-B Academy Road, N.E. - - - -
Albuquerque, NM 87109
Darrell H. Hughes
Suite 210 4,148,883(4) 8.5% 8,075,033 9.4%
7001 Seaview Avenue N.W.
Seattle, WA 98117
David L. Jackson
3707 Calle Cortejo 2,460,471(5) 5.1% 3,756,100 4.4%
Rancho Santa Fe, CA 92091
David G. Lucas
Suite 304 2,618,468(6) 5.4% 3,600,003 4.2%
3220 South Higuera Street
San Luis Obispo, CA
93401
Wilhelm J. Giertsen
Starefossveien 559,213(2)(7) 1.2% 559,213 0.7%
5019 Bergen
Norway
Mohammed I. Marafi
P.O. Box 104 2,289,474(2)(8) 4.8% 2,289,474 2.7%
13002 Safat
Kuwait
All current officers and
directors as a group (5 11,844,290(9) 21.7% 21,879,826 23.8%
persons)
Cognigen Corporation
2608 Second Avenue, 12,842,564(10) 27.3% 34,438,663 40.9%
Suite 108
Seattle, Washington 98121
Kevin E. Anderson
2608 Second Avenue, 23,842,864(11) 41.1% 45,438,663 47.7%
Suite 108
Seattle, Washington 98120
Anderson Family Trust #1
2608 Second Avenue, 23,842,864(12) 41.1% 45,438,663 47.7%
Suite 108
Seattle, Washington 98120
Peter Tilyou
2608 Second Avenue, 26,364,156(13)(14) 44.9% 53,553,549 62.2%
Suite 108
Seattle, Washington 98120
--------------------
(1) Except as indicated below, each person has sole and voting and/or
investment power over the shares listed.
(2) Prior to the meeting, it currently is planned that Messrs. Giertsen and
Marafi will be appointed directors of the Company by the five current directors of
the Company.
(3) Includes 1,600,000 shares underlying an option. Mr. Boswell currently
owns approximately 2.6% of the outstanding common stock of ITHC. If the proposal to
adopt the amendment to Article FOURTH of the Articles of Incorporation is approved,
ITHC will be entitled to receive 37,298,444 shares of the Company's common stock.
Mr. Boswell does not have sole or shared voting and/or investment power over the
shares of the Company's common stock owned by ITHC. Therefore, Mr. Boswell
disclaims beneficial ownership of the approximate 981,535 shares of the Company's
common stock that will be represented by Mr. Boswell's ownership of approximately
2.6% of the outstanding common stock of ITHC. The 981,535 shares are not included
in the above table.
(4) Includes 1,600,000 shares underlying an option. Mr. Hughes currently
owns approximately 10.5% of the outstanding common stock of ITHC. If the proposal
to adopt the amendment to Article FOURTH of the Articles of Incorporation is
approved, ITHC will be entitled to receive an additional 37,298,444 shares of the
Company's common stock. Mr. Hughes does not have sole or shared voting and/or
investment power over the shares of the Company's common stock owned by ITHC.
Therefore, Mr. Hughes disclaims beneficial ownership of the approximate 3,926,150
shares of the Company's that will be represented by Mr. Hughes' ownership of
approximately 10.5% of the outstanding common stock of ITHC. The 3,926,150 shares
are not included in the above table.
(5) Includes 1,600,000 shares underlying an option. Mr. Jackson currently
owns approximately 3.5% of the outstanding common stock of ITHC. If the proposal to
adopt the amendment to Article FOURTH of the Articles of Incorporation is approved,
ITHC will be entitled to receive 37,298,444 shares of the Company's common stock.
Mr. Jackson does not have sole or shared voting and/or investment power over the
shares of the Company's common stock owned by ITHC. Therefore, Mr. Jackson
disclaims beneficial ownership of the approximate 1,295,629 shares of the Company's
common stock that will be represented by Mr. Jackson's ownership of approximately
3.5% of the outstanding common stock of ITHC. The 1,295,629 shares are not included
in the above table.
(6) Includes 1,600,000 shares underlying an option. Mr. Lucas currently
owns approximately 2.6% of the outstanding common stock of ITHC. If the proposal to
adopt the amendment to Article FOURTH of the Articles of Incorporation is approved,
ITHC will be entitled to receive 37,298,444 shares of the Company's common stock.
Mr. Lucas does not have sole or shared voting and/or investment power over the
shares of the Company's common stock owned by ITHC. Therefore, Mr. Lucas disclaims
beneficial ownership of the approximate 981,535 shares of the Company is common
stock that will be represented by Mr. Lucas' ownership of approximately 2.6% of the
outstanding common stock of ITHC. The 981,535 shares are not included in the above
table.
(7) Includes 25,000 shares owned by Mr. Giertsen's wife.
(8) Includes 1,100,000 shares underlying a warrant and an option. Does not
include 1,241,472 shares owned by companies in which Mr. Marafi has a minority
interest.
(9) Includes the shares specified in footnotes (3), (4), (5) and (6) above.
(10) Cognigen Corporation currently owns approximately 57.9% of the
outstanding common stock of ITHC. If the proposal to adopt the amendment to Article
FOURTH of the Articles of Incorporation is approved, ITHC will be entitled to
receive 37,298,444 shares of the Company's common stock. Cognigen will be entitled
to receive 21,595,799 of the shares. However, all of the 37,298,444 shares will be
deemed to be beneficially owned by Cognigen Corporation because Cognigen Corporation
controls ITHC. The 37,298,444 shares are not included in the above table.
(11) Includes the shares owned by Cognigen Corporation and 11,000,000 shares
of the Company's common stock underlying an option owned by the Anderson Family
Trust #1. Kevin E. Anderson has the sole voting and investment power over the
shares of the Company's common stock owned by ITHC. Kevin E. Anderson and members
of his family are the beneficiaries of the Anderson Family Trust #1 which owns
approximately 98.9% of the outstanding common stock of Cognigen Corporation.
Therefore, Mr. Anderson may be deemed to beneficially own the 12,842,864 shares of
the Company's common stock that Cognigen Corporation owns.
(12) Represents the 23,842,864 shares that Kevin Anderson may be deemed to
beneficially own.
(13) Includes the shares owned by the Anderson Family Trust #1, 915,080 shares
(2,878,153 shares after the pro rata distribution) owned by Telkiosk, Inc. and 750,000
shares underlying an option owned by Telkiosk, 856,212 shares (3,486,733 shares after
the pro rata distribution) owned by Combined Telecommunications Consultancy, Ltd.
("CTC") and 1,000,000 shares underlying an option owned by CTC. Peter Tilyou is the
sole trustee, but not a beneficiary, of the Anderson Family Trust #1. As the managing
officer/director of CTC and Telkiosk Mr. Tilyou has voting and investment power over
the shares of the Company's common stock beneficially owned by CTC and Telkiosk. Mr.
Tilyou is the beneficial owner of 33% of the outstanding shares of Telkiosk and 25% of
the outstanding shares of CTC.
(14) The information pertaining to the shares of the Company's common stock
beneficially owned by CTC and Telkiosk and the information pertaining to Peter
Tilyou's relationship to both and to the Anderson Family Trust #1 is based on the
shareholder records of the Company and information provided to the Company by Peter
Tilyou.
(15) Includes the shares that Messrs. Boswell, Hughes, Jackson and Lucas and
Cognigen Corporation will receive as shareholders of ITHC and includes the shares
underlying the options as stated above.
CHANGE IN CONTROL OF THE COMPANY
On August 20, 1999, the Company completed the first closing of the acquisition
of all of the assets of ITHC in exchange for 29,242,953 shares of the Company's
common stock. On December 27, 1999, the Company and ITHC agreed that the total
number of shares of the Company's common stock that were to be issued at the first
closing was 11,742,953 shares rather than 29,242,953 shares and that the total
number of shares to be issued by the Company to ITHC at the second closing is
37,298,444 shares. Further, the Company and ITHC made it clear that the Company was
acquiring all of the assets and assuming all of the liabilities of ITHC as of August
20, 1999.
As a result of ITHC's receipt of the 11,742,953 shares of the Company's common
stock and a previous purchase of 12,602,431 shares of the Company's common stock by
ITHC from David L. Jackson, Patricia A. Jackson, Karrie R. Jackson, and Eric J.
Sunsvold, ITHC owned 24,385,384 shares, or what would have been approximately 75% of
the Company's outstanding shares of common stock on August 20, 1999. Subsequently,
150,000 shares were transferred by ITHC to two persons who were affiliated with CCRI
Corp. and who were instrumental in CCRI Corp. assisting the Company in raising
additional capital. The Company loaned ITHC $190,000 to purchase the 12,602,431
shares. The loan has not yet been repaid. In May 2000, ITHC distributed the
remaining 24,195,384 shares pro rata to its shareholders. If the proposal to adopt
the amendment to Article FOURTH of the Articles of Incorporation is approved, ITHC
will receive 37,298,444 shares, or approximately 44.2% of the Company's then
outstanding shares of common stock. It is contemplated that ITHC will distribute
the 37,298,444 shares pro rata to its shareholders.
Kevin E. Anderson and his family are beneficiaries of the Anderson Family
Trust #1 which owns approximately 98.9% of the outstanding common stock of Cognigen
Corporation. Cognigen Corporation currently owns approximately 27.3% of the
outstanding common stock of the Company. Therefore, Kevin E. Anderson may be deemed
to control the Company.
The assets of ITHC consisted of electronically archived customer data bases
consisting of approximately 95,000 individual residential and business long-distance
telephone service subscriber accounts; agency, reseller and other agreements and
contracts ITHC had with carriers, switched resellers, unswitched resellers,
consolidators or other providers of long-distance and local telephone service;
ITHC's accounts receivable, commissions receivable, future commissions that may be
payable from any of the carriers, switched resellers, unswitched resellers,
consolidators or other providers of long-distance and local telephone service;
ITHC's computer software, proprietary programs and applications, computers, monitors,
peripherals, printers, copiers, telephone PABX systems, office furniture and
fixtures, office leases; customer data bases, customer lists and print and
electronic records relating to customers; ITHC's inventories and orders for prepaid
telephone cards; ITHC's new accounts; ITHC's websites, pages, links and agreements
as well as ITHC's Internet domains and email addresses; agreements with ITHC's
agents and subagents; exclusive use and control of the name "Cognigen" and its
attendant copyright, trade name and trademark and service mark registrations; ITHC's
intellectual property; ITHC's lines of credit with carriers, prepaid card providers,
switched resellers, switchless resellers and other providers of local and
long-distance phone service, ITHC's cash and all of the outstanding stock of
Inter-American Telecommunications Corporation, a non-operating subsidiary of ITHC.
The audited balance sheet of ITHC as of June 30, 1999, and the audited consolidated
statements of operations, cash flows and changes in stockholders' equity of ITHC for
the period July 24, 1998 (inception) through July 30, 1999, the audited balance
sheets of Cognigen Corporation as of June 30, 1999 and 1998 and the audited
statements of income and retained earnings and cash flows of Cognigen Corporation
for the two years ended June 30, 1999, the unaudited consolidated balance sheets of
the Company as of September 30, 2000, and the unaudited consolidated statements of
operations and cash flows for the three months ended September 30, 2000 and 1999,
and the audited consolidated balance sheet of the Company as of June 30, 2000, and
the audited consolidated statements of operations and consolidated statements of
cash flows of the Company for the year ended June 30, 2000, are attached hereto as
Exhibit A.
CERTAIN INFORMATION PERTAINING TO THE COMPANY AND ITHC
As indicated under the caption "Change in Control," on August 20, 1999, the
Company acquired all of the assets of ITHC in exchange for 11,742,953 shares of the
Company's common stock that were issued to ITHC and distributed by ITHC pro rata to
its shareholders and 37,298,444 shares of the Company's common stock that will be
issued to ITHC only if the proposal to adopt the amendment to Article FOURTH of the
Articles of Incorporation is approved at the Meeting. Prior to the acquisition of
the assets of ITHC, the Company had no operations, no assets and minimal
liabilities. The audited balance sheet of ITHC as of June 30, 1999, and the audited
consolidated statements of operations, cash flows and changes in stockholders'
equity of ITHC for the period July 24, 1998 (inception) through July 30, 1999, the
audited balance sheets of Cognigen Corporation as of June 30, 1999 and 1998 and the
audited statements of income and retained earnings and cash flows of Cognigen
Corporation and unaudited pro forma financial information as of June 30, 1999, for
the Company, ITHC and Cognigen Corporation the unaudited consolidated balance sheets
of the Company as of September 30, 2000, and the unaudited consolidated statements
of operations and cash flows for the three months ended September 30, 2000 and 1999,
and the audited consolidated balance sheet of the Company as of June 30, 2000, and
the audited consolidated statements of operations and consolidated statements of
cash flows of the Company for the year ended June 30, 2000, are attached hereto as
Exhibit A.
The transaction between the Company and ITHC was structured as a stock for
assets transaction to enable the first closing to be held without the approval of
the Company's shareholders so that the Company could quickly become engaged in a
business.
ITHC, which was incorporated in July 1998, acquired the assets it transferred
to the Company for a total of $1,600,000 in promissory notes, which were assumed by
the Company, and 7,500 shares of ITHC's common stock. ITHC originally acquired the
assets in 1998 and 1999 from Inter-American Telecommunications Corporation,
Telkiosk, CTC and Cognigen Corporation, all of which were incorporated in 1998.
ITHC, through its Cognigen e-commerce division, was a major marketer of
long-distance telecommunications services. Operating on the Internet via thousands
of Web sites, the Cognigen division marketed both domestic and international
long-distance telephone service as well as prepaid calling cards through a network
of approximately 40,000 independent agents to approximately 157,000 subscribers
worldwide.
Since 1997, the Cognigen division has experienced growth in the retail sales
it has made for third parties, in the size of its agent force and in the number of
subscribers it has acquired and maintained. The Cognigen division's Internet
presence operates through proprietary programs that provide for a high volume of
visits with user friendly procedures that allow on-line fulfillment of service
applications. Typically, a Cognigen division subscriber is able to apply for, and
obtain, discount long-distance service within a matter of hours rather than days.
The Company currently leases approximately 3,457 square feet of office space
at 7001 Seaview Avenue, NW, Suite 210, Seattle, Washington 98117, pursuant to a
lease that will terminate in December 2001 and that currently requires monthly
rental payments of approximately $3,025. The Company also currently leases
approximately 1,007 square feet of office space at 6751 Academy Road, NE, Suite B,
Albuquerque, New Mexico 87109, pursuant to a lease that will terminate in March 2003
and that currently requires monthly rental payments of $1,390.49. The Company's
subsidiary, Cognigen Switching Technologies, Inc., leases approximately 1,760 square
feet of office space at 3220 South Higuera Street, Suite 304, San Luis Obispo,
California 93401, pursuant to a lease that will terminate in April 2002 and that
currently requires monthly rental payments of $2,832.20.
ITHC had 9 employees at the time the ITHC assets were acquired by the
Company. The employees became employees of the Company. As of January ___, 2001,
the Company had ___ full-time employees and ____ part-time employees. In addition,
as of January ___, 2001, the Company had ___ consultants.
The Company's common stock is quoted on the NASD OTC Bulletin Board under the
symbol "CGNT." The following table sets forth, for the periods indicated, the high
and low closing bid price quotations for the common stock as reported by the
National Quotation Bureau, LLC. Such quotations reflect inter-dealer prices, but do
not include retail mark-ups, mark-downs or commissions and may not necessarily
represent actual transactions.
High Closing Low Closing
Bid Bid
------------ -----------
Quarter ended June 30, 2000 $ 1.28125 $ 0.75
Quarter ended March 31, 2000 2.625 1.25
Quarter ended December 31,
1999: 3.625 0.8125
Quarter ended September 30,
1999: 1.00 0.1875
Quarter ended June 30, 1999: $ 0.30 $ 0.125
Quarter ended March 31, 1999: 0.2815 0.03125
Quarter ended December 31,
1998: 0.10 0.08
Quarter ended September 30,
1998: 0.125 0.0625
As a result of the Company's common stock not being quoted on Nasdaq or listed
on an exchange, an investor may find it more difficult to dispose of or to obtain
accurate quotations as to the market value of the Company's common stock. In
addition, the Company is subject to a rule promulgated by the Securities and
Exchange Commission. The rule provides that various sales practice requirements are
imposed on broker/dealers who sell the Company's common stock to persons other than
established customers and accredited investors. For these types of transactions,
the broker/dealer has to make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transactions prior to
sale. Consequently, the rule may have an adverse effect on the ability of
broker/dealers to sell the Company's common stock, which may affect the ability of
purchasers to sell the Company's common stock in the open market.
As of January ___, 2001, there were approximately _____ holders of record of
the Company's common stock. The number of record holders does not include holders
whose securities are held in street name. The closing price of the common stock on
August 20, 1999, the date of the closing of the agreement with ITHC, was $0.7187 per
share. The closing price of the common stock on December ___, 2000, was $____. As
of January ___, 2001, the Company had 47,002,547 shares of common stock outstanding.
The Company has never paid and does not anticipate paying any cash dividends
on its common stock in the foreseeable future. The Company intends to retain all
earnings for use in the Company's business operations and in the expansion of its
business.
ACTIONS TO BE TAKEN AT MEETING
The Meeting has been called by the directors of the Company to consider and
act upon proposals to:
(1) adopt an amendment to Article THIRD of the Articles of Incorporation of the
Company to delete any reference contained in the current Article THIRD
to an area of business in which the Company no longer engages and to
change the wording of the provision in the current Article THIRD that
confers upon the Company all of the rights, powers and privileges
conferred on Colorado corporations;
(2) adopt an amendment to Article FOURTH of the Articles of Incorporation of the
Company which, among other things, increases the authorized shares of
common stock of the Company from 50,000,000 shares to 300,000,000 shares
of $0.001 par value of common stock and authorizes 20,000,000 shares of
no par value preferred stock;
(3) adopt an amendment to Section (d)(ii) of Article EIGHTH of the Articles of
Incorporation of the Company to change the vote required to amend the
Articles of Incorporation to a majority of a quorum;
(4) adopt a new Article NINTH of the Articles of Incorporation of the Company
which limits the liability of the directors of the Company under certain
circumstances;
(5) authorize the Board of Directors of the Company to adopt an amendment to the
Company's Articles of Incorporation at such time as the Board of
Directors deems it appropriate to effectuate a one-for-two, a
one-for-three or a one-for-four reverse split of the Company's
outstanding common stock, the exact reverse split to be determined by
the Board of Directors of the Company; and
(6) approve the Company's 2000 Incentive and Nonstatutory Stock Option Plan.
The holders of one-third of the outstanding shares of common stock of the
Company present at the Meeting in person or represented by proxy constitute a
quorum. To be approved, the proposals specified in items (1) through (5) must
receive the affirmative vote of a majority of the outstanding shares. If a quorum
is present, the proposal specified in item (6) must receive the affirmative vote of
a majority of the shares represented in person or by proxy at the Meeting and
entitled to vote thereon. Where brokers have not received any instruction from their
clients on how to vote on a particular proposal, brokers are permitted to vote on
routine proposals but not on nonroutine matters. The absence of votes on nonroutine
matters are "broker nonvotes." Abstentions and broker nonvotes will be counted as
present for purposes of establishing a quorum, will be counted as present for
purposes of the proposals and will count as votes against all of the proposals.
EXECUTIVE COMPENSATION
The following table provides certain information pertaining to the
compensation paid by the Company and its subsidiaries during the Company's last
three fiscal years for services rendered by Jimmy L. Boswell, Darrell H. Hughes and
David L. Jackson, all of whom were chief executive officers of the Company at various
times during the fiscal year ended June 30, 2000.
Annual Compensation
Long Term
Compensation
Awards
Fiscal Other
Name and Year Annual Securities All Other
Principal Ended Compen- Underlying Compensa-
Position June 30, Salary($) Bonus($) sation($) Options(#) tion($)
David L. Jackson 2000 $ 29,000 -- -- -- -- 1,600,000(a) $24,000(b)
President and 1999 -- -- -- -- -- -- -- -- -- --
Treasurer of the 1998 -- -- -- -- -- -- -- -- -- --
Company until
August 20, 1999,
and Vice
President
and Secretary
thereafter
Jimmy L. Boswell 2000 $103,333 -- -- -- -- 1,600,000(a) -- --
President and 1999 -- -- -- -- -- -- -- -- -- --
Chief Operating 1998 -- -- -- -- -- -- -- -- -- --
Officer of the
Company from
August 20, 1999
through June 30,
2000
Darrell H. Hughes 2000 $ 88,542 -- -- -- -- 1,600,000(a) -- --
President since 1999 -- -- -- -- -- -- -- -- -- --
July 2000 and 1998 -- -- -- -- -- -- -- -- -- --
Chief Executive
Officer since
October 13, 1999
(a) On August 25, 1999, Messrs. Jackson, Boswell and Hughes were each
granted a five year option to purchase 1,600,000 shares of the Company's common
stock at an exercise price of $0.46. Each option is currently exercisable. However,
the Company does not have a sufficient number of shares for such persons to be able
to exercise their options. The Company is requesting that its shareholders approve
an amendment to the Company's Articles of Incorporation to increase the number of
shares the Company is authorized to issue.
(b) The $24,000 was paid as consulting fees prior to the time Mr. Jackson
became an employee of the Company.
OPTION GRANTS TO EXECUTIVE OFFICERS
The following tables sets forth the individual grants of stock options made by
the Company during the Company's fiscal year ended June 30, 2000, to Messrs.
Jackson, Boswell and Hughes:
Number of Percent of
Securities Total Options
Underlying Granted to
Options Employees in
Name Granted Fiscal Year Exercise Price Expiration Date
David L. Jackson 1,600,000 25% $0.46 8/25/2004
Jimmy L. Boswell 1,600,000 25% $0.46 8/25/2004
Darrell H. Hughes 1,600,000 25% $0.46 8/25/2004
The following table provides information with respect to the unexercised
options to purchase the Company's common stock held by Messrs. Jackson, Boswell and
Hughes as of June 30, 2000, the end of the Company's last fiscal year.
Number of Securities
Underlying Unexercised Value of Unexercised In-the-Money
Options at Fiscal Year Options at Fiscal Year End
Name End Exercisable/Unexercisable Exercisable/Unexercisable
David L. Jackson 1,600,000 / 0 $846,000 / $0
Jimmy L. Boswell 1,600,000 / 0 $846,000 / $0
Darrell H. Hughes 1,600,000 / 0 $846,000 / $0
(1) Calculated by multiplying the difference between the exercise price and
the closing bid price of $1.00 per share on June 30, 2000, by the applicable
shares. Does not give consideration to commissions or other market conditions.
Messrs. Jackson, Boswell and Hughes did not exercise any options to purchase
shares of the Company's common stock during the fiscal year ended June 30, 2000.
PROPOSAL NUMBER ONE
APPROVAL OF THE ADOPTION OF AN AMENDMENT TO ARTICLE THIRD
OF THE ARTICLES OF INCORPORATION OF THE COMPANY TO DELETE ANY REFERENCE TO AN AREA
OF BUSINESS IN WHICH THE COMPANY NO LONGER ENGAGES AND TO CHANGE THE WORDING THAT
CONFERS UPON THE COMPANY ALL OF THE RIGHTS POWERS AND PRIVILEGES CONFERRED ON
COLORADO CORPORATIONS
Article THIRD of the Company's Articles of Incorporation currently reads as
follows:
"THIRD: (a) Purposes. The nature, objects and purposes for
which the corporation is organized are to engage in the manufacture,
assembly, licensing and sale of cellular radio and communications
equipment and accessories, to engage generally in the cellular
communications business, to invest in real and personal property, and to
engage in any other lawful activity permitted under the laws of the
State of Colorado, whether or not connected with any of the foregoing
objects and purposes, which is calculated, directly or indirectly, to
promote the interests of the corporation or to enhance the value of its
property.
(b) Powers. In furtherance of the foregoing
purposes the corporation shall have and may exercise all of the rights,
powers, and privileges now or hereafter conferred upon corporations
organized under the laws of Colorado. In addition, it may do everything
necessary, suitable or proper for the accomplishment of any of its
corporate purposes."
The Board of Directors of the Company is recommending Article THIRD be revised
to read as follows:
"THIRD: The corporation shall have and may exercise all of the
rights, powers and privileges now or hereafter conferred upon
corporations organized under the laws of Colorado. In addition, the
corporation may do everything necessary, suitable or proper for the
accomplishment of any of its corporate purposes. The corporation may
conduct part or all of its business in any part of Colorado, the United
States or the world and may hold, purchase, mortgage, lease and convey
real and personal property in any of such places."
The Board of Directors is recommending the change in Article THIRD because the
Company is no longer engaged in the business as set forth in paragraph (a) of the
current Article THIRD. Under the Colorado Business Corporation Act, the Company is
not required to set forth any specific business purpose in its Articles of
Incorporation and the proposed Article THIRD provides a statement similar to the
statement contained in paragraph (b) of the current Article THIRD of the Company's
Articles of Incorporation in that it confers upon the Company all of the rights,
powers and privileges conferred on corporations organized under the laws of Colorado.
The Company has been orally advised that Jimmy L. Boswell, Darrell H. Hughes,
David L. Jackson, David G. Lucas, Wilhelm Giertsen and his wife, Mohammed I. Marafi,
Cognigen Corporation, Telkiosk, CTC and two employees of a wholly owned subsidiary
of the Company, Reginald W. Einkauf and John D. Miller, intend to vote their total
23,846,069 shares, or approximately 50.7% of the shares entitled to be voted at the
meeting, for the adoption of the amendment to Article THIRD of the Articles of
Incorporation of the Company. As a result, the amendment to Article THIRD should be
adopted.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE ADOPTION
OF THE AMENDMENT TO ARTICLE THIRD OF THE ARTICLES OF INCORPORATION OF THE COMPANY AS
SET FORTH ABOVE.
PROPOSAL NUMBER TWO
APPROVAL OF THE ADDITION OF AN AMENDMENT TO ARTICLE FOURTH OF THE ARTICLES OF
INCORPORATION OF THE COMPANY WHICH among other things, increases the
authorized shares of common stock of the Company from 50,000,000 shares to
300,000,000 shares of $0.001 par value common stock and authorizes 20,000,000
shares of no par value preferred stock
The Board of Directors of the Company is recommending that Article FOURTH of
the Company's Articles of Incorporation be revised to read as follows:
"FOURTH (a) The aggregate number of shares which the
corporation shall have authority to issue is 300,000,000 shares of
$0.001 par value common stock ("Common Stock") and 20,000,000 shares of
no par value preferred stock ("Preferred Stock").
(b) Each holder of Common Stock of record shall have
one vote for each share of Common Stock standing in the shareholder's
name on the books of the corporation and entitled to vote, except that
in the election of directors each holder of Common Stock shall have as
many votes for each share of Common Stock held by the shareholder as
there are directors to be elected and for whose election the shareholder
has a right to vote. Cumulative voting shall not be permitted in the
election of directors or otherwise. All holders of Common Stock shall
vote together as a single class on all matters as to which holders of
Common Stock shall be entitled to vote.
(c) Shares of Preferred Stock may be issued from
time to time in one or more series as the Board of Directors may
determine, without shareholder approval, as hereinafter provided. The
Board of Directors is hereby authorized, by resolution or resolutions,
to provide from time to time, out of the unissued shares of Preferred
Stock not then allocated to any series of Preferred Stock, for a series
of Preferred Stock. Before any shares of any such series of Preferred
Stock are issued, the Board of Directors shall (i) fix and determine,
and is hereby expressly empowered to fix and determine, by resolution,
or resolutions, the designations, powers, preferences, relative
participating, optional, and other special rights, qualifications,
limitations, and restrictions, of the shares of such series and (ii)
make such filings and recordings with respect thereto as required by the
Colorado Business Corporation Act. Each series of Preferred Stock shall
be given a distinguishing designation.
The Board of Directors is expressly authorized to vary the
provisions relating to the foregoing matters between the various series
of Preferred Stock. All shares of Preferred Stock of any one series
shall be identical in all respects with all shares of such series,
except that shares of any one series issued at different times may
differ as to the dates from which any dividends thereon shall be payable
and, if cumulative, shall cumulate.
Unless otherwise provided in the resolution, or resolutions, of
the Board of Directors providing for the issuance thereof, the number of
authorized shares of any series of Preferred Stock may be increased or
decreased (but not below the number of shares thereof then outstanding)
by resolution, or resolutions, by the Board of Directors and appropriate
filing and recording to the extent required by the Colorado Business
Corporation Act. In case the number of shares of any such series of
Preferred Stock shall be decreased, the shares representing such
decrease shall, unless otherwise provided in the resolution, or
resolutions, of the Board of Directors providing for the issuance
thereof, resume the status of authorized but unissued shares of
Preferred Stock, undesignated as to series, and may be reissued as part
of such series or as part of any other series of Preferred Stock.
Unless otherwise provided in the resolution, or resolutions, of
the Board of Directors providing for the issuance thereof, shares of any
series of Preferred Stock that shall be issued and thereafter acquired
by the corporation through purchase, redemption (whether through the
operation of a sinking fund or otherwise), conversion, exchange, or
otherwise shall have the status of authorized and unissued shares of
Preferred Stock, undesignated as to series, and may be reissued as part
of such series or as part of any other series of Preferred Stock.
(d) No holder of any shares of the corporation,
whether now or hereafter authorized, shall have any preemptive or
preferential right to acquire any shares or securities of the
corporation, including shares or securities held in the treasury of the
corporation."
The Board of Directors is proposing that the Company increase the authorized
shares of its common stock from 50,000,000 shares to 300,000,000 shares of $0.001
par value common stock and authorize 20,000,000 shares of no par value preferred
stock. The relative rights and limitations of the outstanding common stock would
remain unchanged. As is provided in the current Article FOURTH, the common stock
and preferred stock do not and would not have preemptive rights and cumulative
voting is not and would not be permitted in the election of directors.
As of January ___, 2001, the Company had 47,002,547 shares of common stock
issued and outstanding. In addition, as described under "Change in Control of the
Company," the Company has agreed to issue ITHC an additional 37,298,444 shares of
the Company's common stock at such time as the Company has a sufficient number of
shares of common stock authorized to be able to consummate the issuance. The
Company currently does not have a sufficient number of authorized shares of common
stock to issue the number of additional shares of common stock to which ITHC is
entitled. The agreement does not contain a penalty if the Company violates this
agreement. However, if the Company does not increase the authorized number of
shares in order to issue the additional shares to ITHC, ITHC could claim that ITHC
did not receive all of the consideration it was entitled to in connection with the
acquisition and claim damages from the Company or attempt to rescind the
transaction. The Company has agreed to issue an additional 2,200,000 shares of the
Company's common stock to unaffiliated parties as finders' fees when the Company
issues the additional 37,298,444 shares. Further, the Company currently has
outstanding options to purchase 32,400,000 shares of the Company's common stock and
warrants to purchase 1,500,000 shares of the Company's common stock that cannot be
exercised until the Company has a sufficient number of shares of common stock
authorized to enable the Company to issue shares upon the exercise of the options
and warrants.
The proposed increase in the authorized common stock has been recommended by
the Board of Directors to assure that an adequate supply of authorized unissued
shares is available for the above needs and for such things as future stock
dividends or stock splits or issuances upon the exercise of options granted under
the Company's proposed 2000 Incentive and Nonstatutory Stock Option Plan ("2000
Plan"). The additional authorized shares of common stock or preferred stock could
also be used for such purposes as raising additional capital for the operations of
the Company or acquiring other businesses. The terms of any series of preferred
stock to be issued will be dependent largely on market conditions and other factors
existing at the time of issuance and sale. Except as stated herein, there are
currently no plans or arrangements relating to the issuance of any of the additional
shares of common stock proposed to be authorized or any shares of preferred stock.
Such shares would be available for issuance without further action by the
shareholders.
Under proposed Article FOURTH of the Articles of Incorporation, the Board of
Directors will have the authority to issue authorized shares of the preferred stock
in series and to fix the number, designations, relative rights, preferences and
limitations of the shares of each series, subject to applicable law and the
provisions of the proposed Article FOURTH. The authority of the Board of Directors
includes the right to fix for each series the dividend rate, redemption price,
liquidation rights, sinking fund provisions, conversion rights and voting rights.
The issuance of additional shares of common stock may have, among other
things, a dilutive effect on earnings per share and on the equity and voting power
of existing holders of common stock. Until the Board of Directors determines the
specific rights, preferences and limitations of any shares of preferred stock to be
issued, the actual effects on the holders of common stock of the issuance of such
shares cannot be ascertained. However, such effects might include restrictions on
dividends on the common stock if dividends on preferred stock are in arrears,
dilution of the voting power of the common stock to the extent that any series of
preferred stock has voting rights, and reduction of amounts available on liquidation
as a result of any liquidation preference granted to any series of preferred stock.
The issuance of additional shares of common stock by the Company also may
potentially have an anti-takeover effect by making it more difficult to obtain
shareholder approval of various actions, such as a merger or removal of management.
Issuance of authorized shares of preferred stock could also make it more difficult
to obtain shareholder approval of such actions as a merger, bylaw change, removal of
a director, or amendment of the Articles of Incorporation described below,
particularly in light of the power of the Board of Directors to specify certain
rights and preferences of the preferred stock, such as voting rights, without
shareholder approval. All series of the preferred stock having voting rights and
the common stock would vote together as one class, unless otherwise required by
law. Under the Colorado Business Corporation Act, the holders of preferred stock
would generally be entitled to vote separately as a class upon any proposed
amendment to the Articles of Incorporation or other corporate action, such as a
merger, which would effect an exchange, reclassification or cancellation of all or a
portion of such preferred stock or otherwise affect the preferences or relative
rights of the preferred stock.
The increase in authorized shares of common stock and authorization of
preferred stock has not been proposed for an anti-takeover-related purpose and the
Board of Directors and management have no knowledge of any current efforts to obtain
control of the Company or to effect large accumulations of its common stock.
Section (d) of the revised Article FOURTH is the same as section (e) of the
current Article FOURTH except that the heading has been deleted from section (d) of
the revised Article FOURTH.
In addition to increasing the number of shares of authorized common stock and
authorizing shares of preferred stock, the revised Article FOURTH does not include
two provisions that are in the current Article FOURTH. The first provision that is
not included in the revised Article FOURTH reads as follows:
"(f) Distribution in Liquidation. Upon any liquidation,
dissolution or winding up of the Company, and after paying or adequately
providing for the payment of all its obligations, the remainder of the
assets of the corporation shall be distributed, either in cash or in
kind, pro rata to the holders of the common stock."
Section 7-114-105 of the Colorado Business Corporation Act provides what
happens upon the dissolution of a Colorado corporation so that Section (f) of the
current Article FOURTH is not necessary.
The second provision that is not included in the revised Article FOURTH reads
as follows:
"(g) Partial Liquidation. The Board of Directors may, from time
to time, distribute to the shareholders in partial liquidation, out of
stated capital, or capital surplus of the corporation, a portion of its
assets, in cash or property, subject to the limitations contained in the
statutes of Colorado."
Section 7-106-401 of the Colorado Business Corporation Act governs
distributions to shareholders so that Section (g) of the current Article FOURTH is
not necessary.
The Company has been orally advised that Jimmy L. Boswell, Darrell H. Hughes,
David L. Jackson, David G. Lucas, Wilhelm Giertsen and his wife, Mohamme I. Marafi,
Cognigen Corporation, Telkiosk, CTC and two employees of a wholly owned subsidiary
of the Company, Reginald W. Einkauf and John D. Miller, intend to vote their total
23,846,069 shares, or approximately 50.7% of the shares entitled to be voted at the
meeting, in favor of the adoption of the amendment to Article FOURTH of the Articles
of Incorporation of the Company. As a result, the amendment to Article FOURTH should
be adopted.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE ADOPTION OF
THE AMENDMENT TO ARTICLE FOURTH TO THE ARTICLES OF INCORPORATION AS SET FORTH ABOVE.
PROPOSAL NUMBER THREE
APPROVAL OF THE ADOPTION OF AN AMENDMENT TO SECTION (d)(ii)
OF ARTICLE EIGHTH OF THE ARTICLES OF INCORPORATION TO CHANGE THE VOTE REQUIRED TO
AMEND THE ARTICLES OF INCORPORATION TO A MAJORITY OF A QUORUM
Section (d)(ii) of Article EIGHTH of the Company's Articles of Incorporation
currently reads as follows:
"(ii) When, with respect to any action to be taken by shareholders
of this Corporation, the laws of Colorado require the vote or
concurrence of the holders of two-thirds of the outstanding shares, of
the shares entitled to vote thereon, or of any class or series, such
action may be taken by the vote or concurrence of a majority of such
shares or class or series thereof."
The Board of Directors of the Company is recommending that Section (d)(ii) of
Article EIGHTH be revised to read as follows:
"(ii) Except as bylaws adopted by the shareholders may provide for
a greater voting requirement and except as is otherwise provided by the
Colorado Business Corporation Act with respect to action on a plan of
merger or share exchange, on the disposition of substantially all of the
property of the corporation, on the granting of consent to the
disposition of property by an entity controlled by the corporation and
on the dissolution of the corporation, action on a matter other than the
election of directors is approved if a quorum exists and if the votes
cast favoring the action exceed the votes cast opposing the action. Any
bylaw adding, changing or deleting a greater quorum or voting
requirement for shareholders shall meet the same quorum requirement and
be adopted by the same vote required to take action under the quorum and
voting requirements then in effect or proposed to be adopted, whichever
are greater."
If the amendment to Section (d)(ii) of Article EIGHTH is adopted, one change
will be that abstentions will be treated as abstentions whereas currently
abstentions are treated as negative votes. Currently, for those proposals where the
affirmative vote of two-thirds of the outstanding shares is required, an abstention
is not an affirmative vote and, therefore, is treated as a negative vote. Under the
proposed amendment, the vote on an action other than an action set forth in the
proposed Section (d)(ii) of the Article EIGHTH will be able to be approved if the
votes cast favoring the action exceed the votes cast opposing the action.
Abstentions will have no effect on the vote because they will only be counted to
determine whether or not a quorum exists and not as negative votes. The proposed
Section (d)(ii) will make it easier for the holders of a block of the common stock
of the Company to approve a proposal.
If the amendment to Section (d)(ii) of Article EIGHTH is adopted, the only
other substantive change will be that amendments to the Company's Articles of
Incorporation will be able to be adopted by a majority of a quorum, which is
currently one-third of the outstanding shares, rather than having to be adopted by a
majority of the outstanding shares. If adopted, the amendment to Section (d)(ii)
will make it easier for the holders of a controlling block of the common stock of
the Company to adopt amendments to the Articles of Incorporation of the Company that
could be detrimental to the other shareholders. The amendment to Section (d)(ii) of
Article EIGHTH of the Articles of Incorporation will enable the Company, as a public
company, to more easily obtain the vote necessary to adopt an amendment to the
Company's Articles of Incorporation in the future.
Under the Colorado Business Corporation Act, amendments to articles of
incorporation require the approval of the holders of a majority of a quorum unless
the articles of incorporation, bylaws adopted by the shareholders or the persons
proposing the amendment require a greater vote. The Company's Articles of
Incorporation currently require the vote of a majority of the outstanding shares of
common stock of the Company to amend, repeal or adopt provisions to the Articles of
Incorporation. The requirement set forth in the Company's Articles of Incorporation
was in accordance with the Colorado Corporation Code which was replaced by the
Colorado Business Corporation Act in 1994.
It is proposed to amend the Company's Articles of Incorporation to permit the
stockholders from time to time to amend the Articles of Incorporation by the
affirmative vote of the holders of a majority of a quorum present at a meeting
rather than a majority of the outstanding shares of common stock. Assuming adoption
of the proposed amendment, future amendments would generally require the affirmative
vote of 16.7% of the outstanding shares of common stock instead of the currently
required 50.1% vote, thus reducing by 33.4% the stockholder vote required for
amendments.
The Board of Directors believes that the proposed reduction in the stockholder
vote requirement for amending the Articles of Incorporation would offer the Company
greater flexibility and ease in taking advantage of corporate developments which may
be in the best interests of the Company and its stockholders. The reduced voting
requirement could also enable the Company to effect future amendments to the
Articles of Incorporation at a lower cost to the Company by reducing proxy
solicitation expenses and management time requirements.
Although the Board of Directors does not consider the amendment an
anti-takeover measure, the proposed amendment could be viewed as having the effects
of such a measure because the adoption of the reduced voting requirement may
increase the likelihood that the Board of Directors could obtain stockholder
approval for anti-takeover amendments to the Articles of Incorporation. Such
amendments, if proposed and adopted, could have the effect of enabling the Company
to discourage or make more difficult an attempt by another person to remove
incumbent management or to acquire control of the Company in a transaction which a
majority of stockholders might deem in their best interests. However, the Company's
Board of Directors believes that such possibilities at this time are remote and that
the advantages in making it easier and less costly in soliciting stockholder
approval of actions which might be proposed by the Board of Directors outweighs any
possible anti-takeover impact.
The Company has been orally advised that Jimmy L. Boswell, Troy D. Carl,
Darrell H. Hughes, David L. Jackson, David G. Lucas, Wilhelm Giertsen and his wife,
Mohammed I. Marafi, Cognigen Corporation, Telkiosk, CTC and two employees of a
wholly owned subsidiary of the Company, Reginald W. Einkauf and John D. Miller,
intend to vote their total 23,846,069 shares, or approximately 50.7% of the shares
entitled to be voted at the meeting, in favor of the adoption of the amendment to
Section (d)(ii) of Article EIGHTH of the Articles of Incorporation of the Company.
As a result, the amendment to Article EIGHTH should be adopted.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE IN FAVOR OF THE
ADOPTION OF THE AMENDMENT TO SECTION (d)(ii) OF ARTICLE EIGHTH OF THE ARTICLES OF
INCORPORATION OF THE COMPANY AS SET FORTH ABOVE.
PROPOSAL NUMBER FOUR
APPROVAL OF THE ADOPTION OF A NEW ARTICLE NINTH TO THE
ARTICLES OF INCORPORATION WHICH LIMITS THE LIABILITY OF THE DIRECTORS OF THE COMPANY
UNDER CERTAIN CIRCUMSTANCES
The Board of Directors of the Company is recommending that the Articles of
Incorporation of the Company be amended to add the following Article NINTH:
"NINTH: A director of the corporation shall not be personally
liable to the corporation or to its shareholders for monetary damages
for breach of fiduciary duty as a director. However, this provision
shall not eliminate or limit the liability of a director to the
corporation or to its shareholders for monetary damages otherwise
existing for (i) any breach of the director's duty of loyalty to the
corporation or to its shareholders; (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of
law; (iii) acts specified in Section 7-108-403 of the Colorado Business
Corporation Act, as it may be amended from time to time; or (iv) any
transaction from which the director directly or indirectly derived any
improper personal benefit. If the Colorado Business Corporation Act is
hereafter amended to eliminate or limit further the liability of a
director, then, in addition to the elimination and limitation of
liability provided by the preceding sentence, the liability of each
director shall be eliminated or limited to the fullest extent permitted
by the Colorado Business Corporation Act as so amended. Any repeal or
modification of this Article NINTH shall not adversely affect any right
or protection of a director of the corporation under this Article NINTH,
as in effect immediately prior to such repeal or modification, with
respect to any liability that would have accrued, but for this Article
NINTH, prior to such repeal or modification. Nothing contained herein
will be construed to deprive any director of the director's right to all
defenses ordinarily available to a director nor will anything herein be
construed to deprive any director of any right the director may have for
contribution from any other director or other person."
Section 7-108-402 of the Colorado Business Corporation Act permits Colorado
corporations to include in their articles of incorporation a provision eliminating
or limiting the personal liability of directors to the corporation or its
shareholders for monetary damages for certain breaches of the fiduciary duty of
directors. This section is intended, among other things, to encourage qualified
individuals to serve as directors of Colorado corporations. Article NINTH is
designed to take advantage of this section of the Colorado Business Corporation
Act.
In performing their duties, directors of a Colorado corporation owe fiduciary
obligations to the corporation they serve and its shareholders. These fiduciary
obligations include the duty of care and the duty of loyalty. In simple terms, the
duty of care requires that directors exercise the care that an ordinary prudent
person would exercise under similar circumstances and the duty of loyalty prohibits
faithlessness and self-dealing. The so-called business judgment rule is a specific
application of this directorial standard of conduct to a situation where, after
reasonable investigation, disinterested directors adopt a course of action which, in
good faith, they honestly and reasonably believe will benefit the corporation.
The business judgment rule was and is designed to protect directors of a
corporation from personal liability to the corporation or its shareholders if their
business decisions are subsequently challenged. This rule shields corporate
decision makers and their decisions where the five elements of the rule--a business
decision, disinterestedness, due care, good faith and no abuse of discretion are
present. However, as a practical matter, due to the expense of defending lawsuits
and the frequency in which unwarranted litigation is brought against directors and
officers of corporations, and due to the inevitable uncertainties with respect to
the application of the business judgment rule to a particular set of facts and
circumstances, directors of a corporation must either rely upon indemnity from or
insurance procured by the corporation to defend such lawsuits. Therefore, although
the business judgment rule protects directors from personal liability to the
corporation and its shareholders, unless such indemnity provisions and/or insurance
are available, directors could find themselves faced with the extraordinary expense
of defending themselves in litigation brought by a shareholder who questions a
decision of a director based upon an objective after-the-fact examination of the
facts and circumstances.
The Colorado legislature has recognized that insurance and indemnity
provisions are often a condition of an individual's willingness to serve as a
director of a Colorado corporation. The Colorado Business Corporation Act has, for
some time, specifically permitted corporations to provide indemnity and procure
insurance for its directors. An existing Article of the Company's Articles of
Incorporation presently provides for the indemnification of the directors of the
Company. However, changes in the market for directors' liability insurance have
resulted in the unavailability for directors of many corporations from obtaining any
meaningful liability insurance coverage. Additionally, insurance carriers have, in
many cases, increased premiums to such an extent that the cost of obtaining such
insurance becomes extremely prohibitive. Moreover, current policies often exclude
coverage for areas where service of qualified directors is most needed. The high
cost and sometimes unavailability of meaningful directors' liability insurance is
attributable to some degree to a number of factors which include, among other
things, the granting of significant damage awards.
Although the Company has obtained an aggregate of $2,000,000 of insurance
coverage for the Company's directors, the proposed addition of Article NINTH to the
Articles of Incorporation is designed to assure that the Company's current directors
and its future directors are protected to at least the same extent they would be if
additional insurance coverage were made available. Due to the fact that the Company
is acting as a self-insuror for amounts in excess of $2,000,000 with respect to
director liability coverage, the Company's assets and equity are at risk if there
should ever be a large damage award for which the directors of the Company would be
entitled to indemnification from the Company.
Proposed Article NINTH would protect the Company's directors against personal
liability for breach of their fiduciary obligations to the Company, including their
duty of care. Under Colorado law, absent the adoption of the proposed Article
NINTH, directors of the Company would continue to be liable for negligent violations
of their fiduciary duties. If adopted by the shareholders, proposed Article NINTH
would absolve the directors of liability for negligence in the performance of their
duties, including gross negligence. One of the principal effects of the adoption of
the proposed Article NINTH would be that the Company's shareholders would be giving
up a cause of action against a director of the Company for breach of fiduciary duty,
including but not limited to a breach resulting from making grossly negligent
business decisions involving takeover proposals for the Company. In effect,
directors would not be required to prove that their decisions are protected by the
business judgment rule. However, directors would remain liable for breaches of
their duty of loyalty, for any act of omission not in good faith or which involves
intentional misconduct or a knowing violation of law and for any transaction from
which the directors derived an improper personal benefit or for the payment of a
dividend in violation of the Colorado Business Corporation Act. Furthermore, the
proposed Article NINTH would not eliminate or limit liability of directors arising
in connection with causes of action brought under the federal securities laws.
While the proposed Article NINTH provides directors of the Company with
protection from damages for breaches of their duty of care, it does not eliminate
the directors' duty of care. Accordingly, the proposed Article NINTH would have no
effect on the availability of equitable remedies such as an injunction or rescission
based upon a director's breach of the duty of care. As a practical matter, however,
such equitable remedies may be inadequate. Finally, the proposed Article NINTH
would apply only to claims against a director arising out of his or her role as a
director of the Company and would not apply, if he or she is also an officer, to his
or her role as an officer or in any other capacity other than that of a director of
the Company.
There has never been any litigation involving the Company's Board of Directors
or its individual members in their capacities as directors of the Company nor are
such persons aware that any such litigation is threatened.
The Board of Directors of the Company believes that the possible inability of
the Company to provide additional directors' liability insurance at a reasonable
cost may in the future have a damaging effect on the Company's ability to recruit
and obtain highly qualified independent directors. Therefore, the Company's Board
of Directors believes that the Company should take every step available, such as the
adoption of Article NINTH, to assure that the Company will be able to attract the
best possible directors in the future. The proposed Article NINTH is consistent
with the Colorado Business Corporation Act. The primary purpose of Article NINTH
and the reason it is being recommended for adoption by the shareholders is to ensure
that the Company will continue to be able to attract individuals of the highest
quality and ability to serve as its directors and officers. In addition, each
member of the Board of Directors of the Company has a personal interest in seeing
the limited liability provisions contained in the proposed Article NINTH adopted
even though, as explained previously, there is a potential detriment to the
Company's shareholders.
The Company has been orally advised that Jimmy L. Boswell, Darrell H. Hughes,
David L. Jackson, David G. Lucas, Wilhelm Giertsen and his wife, Mohammed I. Marafi,
Cognigen Corporation, Telkiosk, CTC and two employees Reginald W. Einkauf and John
D. Miller, intend to vote their total 23,846,069 shares, or approximately 50.7% of the
shares entitled to be voted at the meeting, in favor of the adoption of a new Article
NINTH of the Articles of Incorporation of the Company. As a result, the new Article
NINTH should be adopted.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE ADOPTION
OF A NEW ARTICLE NINTH OF THE ARTICLES OF INCORPORATION OF THE COMPANY AS SET FORTH
ABOVE.
PROPOSAL NUMBER FIVE
AUTHORIZATION OF BOARD OF DIRECTORS TO ADOPT AN
AMENDMENT TO THE ARTICLES OF INCORPORATION
AT SUCH TIME AS THE BOARD OF DIRECTORS DEEMS IT APPROPRIATE TO EFFECTUATE A
ONE-FOR-TWO, A ONE-FOR-THREE OR A NONE-FOR-FOUR REVERSE SPLIT OF THE COMPANY'S
OUTSTANDING COMMON STOCK, THE EXACT REVERSE SPLIT TO BE DETERMINED BY THE BOARD OF
DIRECTORS OF THE COMPANY
The Company's common stock trades on the Over-The-Counter Bulletin Board. The
Company's Board of Directors believes that it would be beneficial for the Company
and its shareholders if the Company's common stock is listed on the Nasdaq SmallCap
Market in the future.
In order to be listed on the Nasdaq SmallCap Market, the Company will have to
meet several requirements. One of these requirements is that the common stock have
a minimum bid price of $4.00 per share. As of January ___, 2001, the closing bid
price of the common stock was $____ per share. As a result, the Company, based on
the recent bid price of the Company's common stock, would not be able to have its
common stock eligible to be listed on the Nasdaq SmallCap Market without the Company
effectuating a reverse split in a sufficient amount to attempt to assure that the
Company's common stock would have a minimum bid price of at least $4.00 per share.
The Board of Directors believes that it is in the best interests of the Company's
shareholders that the Company's common stock be included on the Nasdaq SmallCap
Market or another securities trading market at a strategic time in the future.
Accordingly, in anticipation of such strategic time, the Board of Directors has
requested that the shareholders of the Company authorize the Board of Directors to
adopt an amendment to the Company's Articles of Incorporation at such time as the
Board of Directors deems it appropriate to effectuate a one-for-two, a one-for-three
or a one-for-four reverse split of the Company's outstanding common stock in such
manner as is deemed necessary by the Board of Directors in order for the Company to
be listed on the Nasdaq SmallCap Market or to obtain a listing on another trading
system of the NASD, a national securities exchange or another securities trading
market as selected by the Board of Directors in its sole discretion. If such
authority is provided to the Board of Directors, it will enable the Board of
Directors to effectuate a one-for-two, a one-for-three or a one-for-four reverse
split of the Company's outstanding common stock without further action by the
shareholders and enable the Company to expeditiously effectuate a reverse split for
the aforementioned purposes. Any fractional shares resulting from any reverse stock
split will be rounded up to the next whole share.
The Board of Directors further believes that the relatively low per-share
market price of the common stock may impair the acceptability of the common stock to
certain institutional investors and other members of the investing public.
Theoretically, the number of shares outstanding should not, by itself, affect the
marketability of the stock, the type of investor who acquires it or the Company's
reputation in the financial community. In practice this is not necessarily the
case, as certain investors view low-priced stock as unattractive or, as a matter of
policy, are precluded from purchasing low-priced shares. In addition, certain
brokerage houses, as a matter of policy, will not extend margin credit on stocks
trading at low prices. On the other hand, certain other investors may be attracted
to low-priced stock because of the greater trading volatility associated with such
securities.
The amount of a reverse split and the date when a reverse split will occur, if
at all, will be determined by the Board of Directors in its sole discretion. The
reverse stock split will result in each shareholder of record, as of a specific
record date to be determined by the Board of Directors, owning a proportionately
smaller number of shares with the end result being that each shareholder maintains
the proportionate number of shares in the Company's common stock that each
shareholder owned prior to such reverse stock split. For example, with each of the
following numbers used for hypothetical purposes only, if a shareholder owned
1,000,000 shares of the 47,002,547 shares outstanding on a record date determined by
the Board of Directors, and if the Board of Directors effectuates a one-for-two
reverse split stock, then subsequent to the reverse stock split, such shareholder
would own 500,000 shares out of the 23,501,273 shares outstanding. Similarly, the
same shareholder would own 333,334 shares of the 15,667,515 shares outstanding or
250,000 shares out of the 11,750,636 shares outstanding if the Board of Directors
effectuates a one-for-three or a one-for-four reverse split, respectively. The
shareholder would maintain the same percentage ownership interest in the outstanding
common stock both prior to and subsequent to the hypothetical reverse stock splits.
A reverse stock split effectuated by the Board of Directors would not, by itself,
result in any taxable distributions or any dilution to the shareholders.
As mentioned above, the closing bid price of the Company's common stock on
January ___, 2001, was $____ per share. Assuming the Board of Directors had
effectuated a one-for-two reverse split as of January ___, 2001, theoretically the
closing price that day would have been $____ per share. Assuming the Board of
Directors had effectuated a one-for-three reverse split or a one-for-four reverse
split as of January ___, 2001, theoretically the closing price that day would have
been $____ or $____, respectively. The aforementioned are for illustration purposes
only. There are no assurances that the Company's common stock would trade after a
reverse split at a price directly proportional to the price that the common stock
traded at prior to the reverse split. In most cases, the public trading price of a
security after a reverse split will be less than a price that is proportional to the
price before the reverse split.
The Board of Directors believes that giving authority to the Board of
Directors to effectuate a one-for-two, a one-for-three or a one-for-four reverse
split at such time as the Board of Directors deems it appropriate is in the best
interests of the Company and its stockholders. The Board of Directors will not
effectuate any such reverse split with a view to, or in connection with, any plan or
purpose of effecting a transaction specified in Rule 13e-3 adopted under the
Securities Exchange Act of 1934.
The Company has been orally advised that Jimmy L. Boswell, Darrell H. Hughes,
David L. Jackson, David G. Lucas, Wilhelm Giertsen and his wife, Mohammed I. Marafi,
Cognigen Corporation, Telkiosk, CTC and two employees of a wholly owned subsidiary
of the Company, Reginald W. Einkauf and John D. Miller, intend to vote their total
23,846,069 shares, or approximately 50.7% of the shares entitled to be voted at the
meeting, in favor of the authorization of the Board of Directors to adopt an amendment
to the Articles of Incorporation to effectuate a one-for-two, a one-for-three or a
one-for-four reverse stock split. As a result, the proposal to authorize the Board of
Directors to adopt an amendment to the Articles of Incorporation to effectuate a
one-for-two, a one-for-three or a one-for-four reverse stock split should be adopted.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE IN FAVOR OF THE
AUTHORIZATION OF THE BOARD OF DIRECTORS TO ADOPT AN AMENDMENT TO THE ARTICLES OF
INCORPORATION TO EFFECTUATE, A ONE-FOR-TWO, A ONE-FOR-THREE OR A ONE-FOR-FOUR
REVERSE STOCK SPLIT.
PROPOSAL NUMBER SIX
APPROVAL OF 2000 INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN THAT RESERVES
5,000,000 SHARES OF COMMON STOCK FOR THE GRANT OF OPTIONS
Summary
The Company's Board of Directors is recommending the adoption of the 2000
Incentive and Nonstatutory Stock Option Plan (the "2000 Plan"). A copy of the 2000
Plan is attached to this Proxy Statement as Exhibit B. The following is a brief
summary of the 2000 Plan, which is qualified in its entirety by reference to Exhibit
B.
Options granted under the 2000 Plan may be either nonstatutory stock options
("Nonstatutory Options") or incentive stock options ("Incentive Options"). The
purpose of the 2000 Plan is to advance the interests of the Company, its
shareholders and its subsidiaries by encouraging and enabling selected officers,
directors, employees and consultants of the Company, upon whose judgment, initiative
and effort the Company is largely dependent for the successful conduct of its
business, to acquire and retain a proprietary interest in the Company by ownership
of its stock through the exercise of stock options.
Amount of Common Stock Subject to Options Under the 2000 Plan
The 2000 Plan provides for the grant of stock options covering an aggregate of
5,000,000 shares of common stock. The aggregate 5,000,000 shares of common stock is
subject to equitable adjustments for any stock dividends, stock splits, reverse
stock splits, combinations, recapitalizations, reclassifications or any other
similar changes which may be required in order to prevent dilution. Any option
which is not exercised prior to expiration or which otherwise terminates will
thereafter be available for further grant under the 2000 Plan.
Administration of the 2000 Plan
The 2000 Plan may be administered by the Board of Directors or by a committee
appointed by the Board of Directors consisting of not fewer than two non-employee
members of the Board of Directors (the "Committee"). Subject to the conditions set
forth in the 2000 Plan, the Board of Directors or the Committee has full and final
authority to determine the number of shares represented by each option, the
individuals to whom and the time or times at which options will be granted and be
exercisable, their exercise prices and the terms and provisions of the respective
agreements to be entered into at the time of grant, which may vary. The 2000 Plan is
intended to be flexible and a significant amount of discretion is vested in the
Board of Directors or the Committee with respect to all aspects of the options to be
granted under the 2000 Plan.
Participants
Nonstatutory Options may be granted under the 2000 Plan to any person who is
or who agrees to become an officer, director, employee or consultant of the Company
or any of its subsidiaries. Incentive Options may be granted only to persons who
are employees of the Company or any of its subsidiaries. As of January ___, 2001,
the Company and its subsidiaries had approximately ___ employees. The participants
will not be required to pay any sums for the granting of options, but may be
required to pay the Company for extending the options. No Options have been granted
under the 2000 Plan.
Exercise Price
The exercise price of each Nonstatutory Option granted under the 2000 Plan
will be determined by the Board of Directors or the Committee. The exercise price
of each Incentive Option granted under the 2000 Plan will be determined by the Board
of Directors or the Committee and will in no event be less than 100% (110% in the
case of a person who owns directly or indirectly more than 10% of the common stock)
of the fair market value of the shares of common stock on the date of grant. The
payment of the exercise price of an option may be made in cash or shares of common
stock, as more fully described under "Exercise of Options". Fair market value will
be determined by the Board of Directors or the Committee in accordance with the 2000
Plan and such determination will be binding upon the Company and upon the holder.
The closing price of the common stock on January ___, 2001 was $_____ per share.
Terms of Options
Options may be granted for a term of up to 10 years (five years in the case of
Incentive Options granted to a person who owns directly or indirectly more than 10%
of the Company's outstanding common stock), which may extend beyond the term of the
2000 Plan.
Exercise of Options
The terms governing the exercise of options granted under the 2000 Plan will
be determined by the Board of Directors or the Committee, which may limit the number
of options exercisable in any period. Payment of the exercise price upon exercise
of an option may be made in any combination of cash and shares of common stock,
including the automatic application of shares of common stock received upon exercise
of an option to satisfy the exercise price of additional options (unless the Board
of Directors or the Committee provides otherwise). Where payment is made in common
stock, such common stock will be valued for such purpose at the fair market value of
such shares on the date of exercise.
Nontransferability
Incentive Options granted under the 2000 Plan are not transferable or
assignable, other than by will or the laws of descent and distribution and, during
the lifetime of the holder, options are exercisable only by the holder.
Nonstatutory Options do not have to contain restrictions on transferability.
Termination of Relationship
Except as the Board of Directors or the Committee may expressly determine
otherwise, if the holder of an Incentive Option ceases to be employed by or to have
another qualifying relationship (such as that of director) with the Company or any
of its subsidiaries other than by reason of the holder's death or permanent
disability, all Incentive Options granted to such holder under the 2000 Plan will
terminate immediately, except for Incentive Options which were exercisable on the
date of such termination of relationship which Incentive Options will terminate
three months after the date of such termination of relationship, unless such
Incentive Options specify by their terms an earlier expiration or termination date.
In the event of the death or permanent disability of the holder of an Incentive
Option, options may be exercised to the extent that the holder might have exercised
the options on the date of death or permanent disability for a period of up to 12
months following the date of death or permanent disability, unless by their terms
the options expire before the end of such 12 month period.
Amendment and Termination of the 2000 Plan
The Board of Directors may at any time and from time to time amend or
terminate the 2000 Plan, but may not, without the approval of the shareholders of
the Company representing a majority of the voting power present at a shareholder's
meeting or represented and entitled to vote thereon, or by unanimous written consent
of the shareholders, (i) increase the maximum number of shares of common stock
subject to options which may be granted under the 2000 Plan, other than in
connection with an equitable adjustment, (ii) change the class of employees eligible
for Incentive Options, or (iii) make any material amendment under the 2000 Plan that
must be approved by the Company's shareholders for the Board of Directors to be able
to grant Incentive Options under the 2000 Plan. No amendment or termination of the
2000 Plan by the Board may alter or impair any of the rights under any option
granted under the 2000 Plan without the holder's written consent.
Effective Date and Term of the 2000 Plan
Options may be granted under the 2000 Plan during its 10 year term, which will
commence on the date of the Meeting.
Material Federal Income Tax Consequences
The following discussion of the federal income tax consequences is based on
the Company's belief after consultation with the Company's tax advisors. The
Company has not obtained an opinion from legal counsel with respect to the following
matters.
Incentive Options. The Company believes that with respect to Incentive
Options granted under the 2000 Plan, no income generally will be recognized by an
optionee for federal income tax purposes at the time such an option is granted or at
the time it is exercised. If the optionee makes no disposition of the shares so
received within two years from the date the Incentive Options was granted and one
year from the receipt of the shares pursuant to the exercise of the Incentive
Option, the optionee will generally recognize long term capital gain or loss upon
the disposition of the shares of common stock issued upon exercise of the Incentive
Option.
If the optionee disposes of shares of common stock acquired by exercise of an
Incentive Option before the expiration of the applicable holding period, any amount
realized from such a disqualifying disposition will be taxable as ordinary income in
the year of disposition generally to the extent that the lesser of the fair market
value of the shares of common stock on the date the option was exercised or the fair
market value at the time of such disposition exceeds the exercise price. Any amount
realized upon such a disposition in excess of the fair market value of the shares of
common stock on the date of exercise generally will be treated as long term or short
term capital gain, depending on the holding period of the shares. A disqualifying
disposition will include the use of shares of common stock acquired upon exercise of
an Incentive Option in satisfaction of the exercise price of another option prior to
the satisfaction of the applicable holding period.
The Company will not be allowed a deduction for federal income tax purposes at
the time of the grant or exercise of an Incentive Option. At the time of a
disqualifying disposition by an optionee, the Company will be entitled to a
deduction for federal income tax purposes equal to the amount taxable to the
optionee as ordinary income in connection with such disqualifying disposition
(assuming that such amount constitutes reasonable compensation).
Nonstatutory Options. The Company believes that the grant of a Nonstatutory
Option under the 2000 Plan will not be subject to federal income tax. Upon
exercise, the optionee generally will recognize ordinary income, and the Company
will be entitled to a corresponding deduction for federal income tax purposes
(assuming that such compensation is reasonable), in an amount equal to the excess of
the fair market value of the shares of common stock on the date of exercise over the
exercise price. Gain or loss on the subsequent sale of shares of common stock
received on exercise of a Nonstatutory Option generally will be long term or short
term capital gain or loss, depending on the holding period of the shares.
The Company has been orally advised that Jimmy L. Boswell, Darrell H. Hughes,
David L. Jackson, David G. Lucas, Wilhelm Giertsen and his wife, Mohammed I. Marafi,
Cognigen Corporation, Telkiosk, CTC and two employees of the Company, Reginald W.
Einkauf and John D. Miller intend to vote their total 23,846,069 shares, or
approximately 50.7% of the shares entitled to be voted at the meeting, in favor of the
approval of the 2000 Incentive and Nonstatutory Stock Option Plan. As a result, the
2000 Incentive and Non-statutory Stock Option Plan should be approved.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE APPROVAL OF
THE 2000 INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN.
SHAREHOLDER PROPOSALS
Proposals of shareholders intended to be presented at the next Annual Meeting
of Shareholders must be received by the Company within a reasonable time prior to
the time the Company begins to print and mail the proxy materials for such Meeting.
SOLICITATION OF PROXIES
The cost of soliciting proxies, including the cost of preparing, assembling
and mailing this proxy material to shareholders, will be borne by the Company.
Solicitations will be made only by use of the mails, except that, if necessary to
obtain a quorum, officers and regular employees of the Company may make
solicitations of proxies by telephone or electronic facsimile or by personal calls.
Brokerage houses, custodians, nominees and fiduciaries will be requested to forward
the proxy soliciting material to the beneficial owners of the Company's shares held
of record by such persons and the Company will reimburse them for their charges and
expenses in this connection.
OTHER BUSINESS
The Company's Board of Directors does not know of any matters to be presented
at the Meeting other than the matters set forth herein. If any other business
should come before the Meeting, the persons named in the enclosed form of Proxy will
vote such Proxy according to their judgment on such matters.
BY ORDER OF THE BOARD OF DIRECTORS
DAVID L. JACKSON, SECRETARY
Seattle, Washington
January ___, 2001
PRELIMINARY COPY
PROXY
COGNIGEN NETWORKS, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD FEBRUARY ___, 2001
The undersigned hereby constitutes and appoints Darrell H. Hughes and David L.
Jackson, and each of them, the true and lawful attorneys and proxies of the
undersigned with full power of substitution and appointment, for and in the name,
place and stead of the undersigned, to act for and to vote all of the undersigned's
shares of $0.001 par value common stock ("common stock") of Cognigen Networks, Inc,
a Colorado corporation (the "Company") at the Special Meeting of Shareholders (the
"Meeting") to be held in the Special Events Room on the Second Floor, 7001 Seaview
Avenue, NW, Seattle, Washington 98117, on __________, February ___, 2001, at 10:00
a.m., Pacific Time, and at all adjournment(s) thereof for the following purposes:
(1) adoption of an amendment to Article THIRD of the Articles of
Incorporation of the Company to delete any reference contained in the current
Article THIRD to an area of business in which the Company no longer engages and to
change the wording of the provision in the current Article THIRD that confers upon
the Company all of the rights, powers and privileges conferred on Colorado
corporations;
[ ] FOR
[ ] AGAINST
[ ] ABSTAIN
(2) adoption of an amendment to Article FOURTH of the Articles of
Incorporation of the Company which, among other things, increases the authorized
shares of common stock of the Company from 50,000,000 shares to 300,000,000 shares
of $0.001 par value common stock and authorizes 20,000,000 shares of no par value
preferred stock;
[ ] FOR
[ ] AGAINST
[ ] ABSTAIN
(3) adoption of an amendment to Section (d)(ii) of Article EIGHTH of the
Articles of Incorporation of the Company to change the vote required to amend the
Articles of Incorporation to a majority of a quorum;
[ ] FOR
[ ] AGAINST
[ ] ABSTAIN
(4) adoption of a new Article NINTH of the Articles of Incorporation of the
Company which limits the liability of the directors of the Company under certain
circumstances;
[ ] FOR
[ ] AGAINST
[ ] ABSTAIN
(5) approval of a proposal to authorize the Board of Directors of the
Company to adopt an amendment to the Company's Articles of Incorporation at such
time as the Board of Directors deems it appropriate to effectuate a one-for-two, a
one-for-three or a one-for-four reverse split of the Company's outstanding common
stock, the exact reverse split to be determined by the Board of Directors of the
Company; and
[ ] FOR
[ ] AGAINST
[ ] ABSTAIN
(6) approval of the 2000 Incentive and Nonstatutory Stock Option Plan.
[ ] FOR
[ ] AGAINST
[ ] ABSTAIN
The undersigned hereby revokes any proxies as to said shares heretofore given
by the undersigned and ratifies and confirms all that said attorneys and proxies
lawfully may do by virtue hereof.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS SPECIFIED. IF NO
SPECIFICATION IS MADE, THEN THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AT
THE MEETING FOR THE ITEMS LISTED ABOVE.
The undersigned hereby acknowledges receipt of the Notice of Special Meeting
of Shareholders and the Proxy Statement furnished therewith.
Dated and Signed: ______________, 2001
Signature(s) should agree with the name(s) stenciled
hereon. Executors, administrators, trustee, guardians
and attorneys should so indicate when signing.
Attorneys should submit powers of attorney.
